This correspondence between Agent Nugent and Commissioner Anslinger's office was
obtained through the FOI act.

REPORT OF SURVEY

COMMERCIALIZED HEMP (1934-35 CROP)

in the

STATE OF MINNESOTA

H.T. NUGENT FIELD SUPERVISOR

October, 1938

TREASURY DEPARTMENT BUREAU OF NARCOTICS MINNEAPOLIS, MINN.

OFFICE OF DISTRICT SUPERVISOR DISTRICT NO 12 STATES OF MINNESOTA, IOWA, NEBRASKA, NORTH
AND SOUTH DAKOTA, October 22nd, 1938

In re: Commercialized Hemp State of Minnesota.

Mr. Harry J. Anslinger, Commissioner of Narcotics, Washington, D.C.

Dear Mr. Anslinger:

Pursuant to your instructions that a complete and comprehensive survey be made of the
commercialized hemp industry in southern Minnesota, particularly with respect to the
extent of the 1934 and 1935 crop of harvested hemp stored in the fields at the present
time, permit me to advise that I proceeded to Minnesota on September 1st, 1938, and for a
period of six weeks covered the southern section of the state from Winona County, in the
east, to Yellow Medicine County, in the west; visited many farms and talked with the
farmers; conferred with officers of companies responsible for the growth of the 1934, 1935
and 1937 crops; obtained statistical information regarding acreage planted, harvested and
removed from the fields, discussed the hemp situation with state, county and local
officials, as well as numerous citizens interested in the subject and the following report
is respectfully submitted for your information:

HISTORICAL

Prior to 1933 the growing of hemp in Minnesota had been confined to experimental crops,
altho in the neighboring state of Wisconsin hemp had been grown for a number of years on a
commercial scale in several counties. In North and South Dakota experimental work in the
growing of hemp had been carried on for a number of years. Glowing reports were prepared
by agricultural authorities and the suitability of soil and climatic conditions of the
territory were stressed. The value of hemp as a farm product was emphasized, but no
mention was made of the fact that from 1880 to 1933 the hemp grown in the United States
had declined from 15,000 to 1,200 acres, and that the price of line hemp had dropped from
$12.50 per pound in 1914 to $9.00 per pound in 1933.

During the Fall of 1933, one Frank E. Holton appeared at Mankato, Minnesota, armed with
an array of statistics dealing with hemp production. Holton, prior to 1917, had been
Cashier of the national Bank, at Minneapolis. The record is not clear regarding the
severance of his connection with that institution, but he subsequently engaged in the
business of dealing in land mortgages and securities under the name of the Dansher-Holton
Land Company. That venture ended in a failure and Holton started dealing in mining stock.
He was connected with the Homestake Extension Mines Corporation and with the Mines
Brokerage Company. In 1927 he filed a petition in bankruptcy, listing liabilities at
$85,000 and assets at $2,000. Holton was a promoter of anything which would net him an
income, so when he met Harry W. Bellrose, President of the World Fibre Corporation,
Chicago, Illinois, who controlled the Selvig patent on a decorticating machine, he
visualized a great hemp industry and decided upon southern Minnesota as his field of
operations. He negotiated with Bellrose and secured the patent rights for the Selvig
machine in the State of Minnesota.

At the time of Holton's visit to Mankato in the Fall of 1933, the farmers had finished
a poor season and conditions were favorable for inaugurating a new venture. He conferred
with farmers, citizens of Mankato and individuals interested in the town's financial
institutions. Mass meetings were held and Holton extolled the virtues of hemp as a means
of bringing a new and profitable product to the community. He characterized the Selvig
patented decorticating machine as something which would revolutionize the hemp industry.
Holton's scheme for growing the hemp under a so called "grower's contract" would
enable the farmer to maintain a financial interest in the processing and manufacturing of
the hemp as well as in the growing of it because the contract provided for the payment by
the farmer of $10.00 per acre for each acre planted. The cost of the seed would be
deducted, as would $1.00 per acre planted as a contract fee. The farmers could pay the
$10.00 upon execution of the contract, or in lieu of cash, Holton would accept their
promissory notes. In return, Holton agreed to pay the farmers $15.00 per ton for the hemp
grown. Nothing contained in the contract, however, made any stipulation with respect to
its duration and a perusal of it suggests the thought that little thought was given to the
phraseology employed in drafting it (See Exhibit "A").

NORTHWEST HEMP CORPORATION:

In order to carry out his hemp growing venture, Holton organized the Northwest Hemp
Corporation under the laws of the State of Minnesota. The purpose of this corporation, as
shown by the official record, was to "encourage and develop the growth of hemp and
flax and other fibre plants, and to enter into contracts with growers for the planting of
such products; to engage in the manufacture and distribution of hemp and flax fibre and to
own and operate factories to handle and decorticate all such fibre plants, etc." The
total number of authorized shares was to be 500 of no par value and the amount of capital
was $1,000. The Certificate was filed October 3, 1933.

Following the organization of the company, Holton proceeded to sell stock and negotiate
the grower's contract. Many citizens of Mankato and Blue Earth purchased shares of stock
at $500.00 per share and during the following six months he had succeeded in obtaining the
signatures of 551 farmers to contracts covering 6,358 acres in southern Minnesota counties
and with those contracts came cash and promissory notes, the latter variously estimated at
between $35,000 and $40,000. Holton, in the meanwhile, had interested the officers of the
National Citizens Bank of Mankato in his venture and they became quite active in rendering
assistance. At least two of the officers and directors are known to have invested quite
extensively in stock of the Northwest Hemp corporation.

THE 1934 CROP:

During the late spring of 1934 the actual growing of the hemp was under way. Seed had
been supplied by Holton and it had been planted by the farmers. In order to facilitate
operations and provide accessibility for handling of harvested crops, the growing area was
divided into three units, viz., Blue Earth, Mankato and Lake Lillian. At Blue Earth and
Mankato two buildings were constructed to house the decorticating machines (See Exhibits
"B" and "C"). At Lake Lillian an old railroad building, adjacent to
the depot, was leased from the Minnesota & Western Railway Company (See Exhibit
"D"). Decorticating machines were leased from the World Fibre Corporation of
Chicago, and installed in the three buildings. Everything was set for the harvesting,
decorticating and marketing of the 1934 crop of hemp.

All authorities agree on three phases of hemp growing, i.e., first, it should be
harvested when the pollen bearing plants are in full bloom; secondly, it must be harvested
with machines designed for that purpose, and thirdly, the retting of the hemp stalks is
the most important item in handling the crop. Dew retting, or spreading the green stalks
on the stubble and allowing them to remain there until sufficiently decomposed so that the
bark can be readily separated from the stalks is a recognized practice in this country,
but the fact that Holton knew nothing about growing hemp is evidenced by his instructions
to the farmers to cut , bundle and stack the crop without any retting operation. As a
result two significant features were brought to light, viz., the decorticating machines
failed to properly separate the fibre from the stalks and four years later the hemp still
stacked in the fields was found to contain tops, leaves and stalks that were still green.
To add to the difficulties encountered, Holton failed to provide any harvesting machinery
as provided in the contract and the farmers were compelled to employ a rather unorthodox
method of cutting and bundling the stalks.

In order to keep the hemp growing project alive, Holton arranged to move quantities of
the harvested crop to the three decorticating plants at Mankato, Blue Earth and Lake
Lillian before it had been properly retted. Hemp stalks properly retted and decorticated
should produce 25 percent fibre, but the processing operations at Mankato and Blue Earth
were netting much less that amount, while the machine at Lake Lillian would not separate
fibre at all. During the Fall of 1934 and the following Winter, practically nothing was
accomplished in the way of marketing the 1934 crop. The decorticating plants at Mankato
and Blue Earth were operated intermittently and experimentation was the order of the day,
but Holton continued to keep alive the enthusiasm of the farmers and stockholders.

THE 1935 CROP:

Came time for the planting of the 1935 crop and Holton had succeeded in prevailing on
147 farmers to sign another grower's contract, but of that number only 13 resided in the
Mankato and Blue Earth areas. The farmers in those areas who had grown hemp under the 1934
contracts were too close to the seat of operations, I.e., Mankato, where the Northwest
Hemp Corporation maintained an office, and they surmised that all was not well, or at
least not as well as had been predicted, consequently only a few evidenced a desire to
take further chances. The farmers in the Lake Lillian area, one hundred miles to the
northwest, were still in the dark but sublimely hopeful that they would eventually receive
the $15.00 per ton for the hemp they had grown in 1934, and were so impressed by Holton's
promises that 134 of their number agreed to plant 1,904 acres. Again Holton secured their
signatures to the growers contracts and collected their promissory notes in lieu of cash.
Again he furnished the seed and it was planted.

As in the Fall of 1934, the farmers cut, bundled and stacked their hemp without
retting. The Lake lillian farmers were becoming impatient. Holton's promise to have the
decorticating machine adjusted, or changed, so as to enable it to process the hemp had not
materialized and, too, the 1934 crop still remained on the fields, so they took matters
into their own hands and subscribed $1,600 with which to purchase a drying apparatus. One
Carl Anderson was placed in charge of operations and they undertook to decorticate the
hemp by first trying to dry it and then running it through the decorticating machine, but
the operation was fundamentally wrong and their efforts to decorticate the hemp at a
reasonable production cost was not successful. Approximately twenty tons of fibre were
reclaimed. It was stored in the building and remains there at the present time.

No better success was obtained at the decorticating plants at Mankato and Blue Earth. A
few tons of hemp were decorticated at a time and the decorticating machines only operated
when samples of fibre were needed to send to prospective purchasers. Dissension broke out
in the ranks of the stockholders. The National Citizens bank of Mankato had considerable
money tied up in the hemp venture and a number of its officers and directors had invested
quite heavily. A movement was started to oust Holton as controlling factor in the
northwest Hemp Corporation, but it was a one man corporation and Holton controlled the
stock and held the principal assets, viz., the promissory notes given by the farmers at
the time they signed the grower's contracts, as well as the contracts which were so worded
as to give him a lien on the hemp stacked in the fields. The 1934 crop had not been
removed from the farms and little prospect prevailed for removing that grown in 1935.

NATIONAL CELLULOSE CORPORATION:

During the fall of 1935, and at a time when the situation was most acute, one M.J.
Connolly, of New York, appeared at Mankato and claimed to have certain patents for
utilizing hemp fibre and its by-products, particularly hurds which could be used in the
manufacture of cellulose products. Connolly had a long and checkered career in promoting
fibre companies and he found the southern Minnesota territory a ripe field. The
anti-Holton faction, led by Joseph H. Gunderson, an officer of the Blue Earth State Bank,
at Blue Earth, who was one of the original subscribers to the hemp venture, and V.A.
Batzner, and officer of the Citizens National Bank of Mankato, waxed enthusiastic over
connolly's scheme to use the hemp in the manufacture of cellulose products. Holton's
attempts to market hemp had been unsuccessful and he saw an opportunity to unload his
burden, so the National Cellulose Corporation was formed with capital stock of one
thousand shares, without par value. A certificate was issued by the State of Minnesota on
October 3rd, 1935, and the farmers, the stockholders of the parent company and citizens
alike took on a new lease on life.

The National Cellulose Corporation had entered into an agreement with the Northwest
Hemp Corporation whereby the former would transfer to the latter all Connolly's patent
rights to formulae relating to the treatment and processing of hemp and the manufacture of
hemp products. Connolly was to get sixty percent of the capital stock of the new company
and be paid $1,000 per month and expenses for the first ninety days after commencing
operations. The Northwest Hemp Corporation agreed to turn over the decorticating plant at
Mankato to the new company, take 40 percent of the capital stock and pay it $30,000. Of
this sum $20,000 was to be deposited immediately upon organization in the National
Citizens Bank of Mankato and credited to the account of the new organization. The balance
of $10,000 was to be paid in thirty days. Furthermore, the Northwest Hemp Corporation
agreed to deliver all of its 1934 and 1935 hemp crops to the National Cellulose
Corporation at $12,000 per ton with a maximum of 15,000 tons. The organization was
perfected, but the Northwest Hemp Corporation never put up any of the money pledged.
Connolly, however, started operations, put in some new machinery, placed his son on the
payroll, and started experimenting in the production of cellulose products. Quantities of
hemp were hauled in from farms adjacent to Mankato. The new machinery turned out tons of
pulverized hurds, but no purchasers could be found for the product. Money was going out
and none coming in. Finally a Government cellulose expert visited Mankato and after
surveying the operations, reported that Connolly did not know what he was doing, so the
new venture folded up. Connolly departed from Mankato and all the blissful expectations of
the farmers were dimmed by the reality that they still had the hemp stacked in the fields,
and the local interests backing the venture became convinced that they had been taken for
another financial ride.

HEMP CHEMICAL CORPORATION:

The woes and worries of those interested in promoting the National Cellulose
Corporation and marketing the 1934 and 1935 crops of hemp were increased when it was
learned that they were using a corporation title already registered in an eastern state.
The State Securities Commissioner advised that the name of the corporation would have to
be changed, so at a meeting of the stockholders it was voted to change the name to the
Hemp Chemical Corporation and under that name the Connolly project continued to operate
until operations were discontinued.

CHEMPCO, INCORPORATED:

Joseph H. Gunderson, Cashier of the Blue Earth State Bank, at Blue Earth, Minnesota,
and hereinbefore mentioned as being quite active in the promotion of the original growing
project, as well as the formation of the National Cellulose Corporation, was a small town
banker with big city ideas. A product of Rake, a hamlet on the Iowa side of the state
line, he started his career in a bank at Frost Minnesota, and then went to the Blue Earth
Bank as Cashier. He had invested heavily in the hemp venture, but regardless of the
failures which it had encountered, he had visions of doing something in a big way, so
after the Connolly debacle he solicited financial aid from his friends and in the early
Spring of 1936 organized the Chempco, Incorporated, under the laws of the state of
Delaware, "to process, buy, sell, deal in and use fibre plants, etc., etc." The
Certificate of Incorporation , as a foreign corporation, being filed in the Office of the
Secretary of State, at St. Paul, Minnesota, on March 10, 1936.

Chempco, Incorporated, took over the old plant of the Union Fibre Corporation, at
Winona, Minnesota, which had gone into bankruptcy several years before (See Exhibit
"E"). Gunderson, its president, negotiated with Dr. J. M. Johnson, of
Hartington, Nebraska, who had organized the Nebraska Fibre Corporation during 1935 and
grown 3,676 acres of hemp under a grower's contract with 161 farmers in the Hartington
region of Nebraska, for the purchase of that crop. The Nebraska hemp was still stacked on
the farms and the farmers were anxious to dispose of it. Gunderson's proposition to buy
the hemp and process it at Winona was a blessing in disguise and he encountered little
difficulty in acquiring it. In addition to that, Gunderson announced that he was in the
market to buy any of the 1934-1935 crop grown in Minnesota under Holton, or Northwest Hemp
Corporation contract, that farmers wanted to sell.

During 1936, the activities of Chempco, Incorporated, were chiefly devoted to
processing the hemp obtained from Nebraska territory and the fibre was marketed through
the Harry H. Straus organization, which later developed the Central Fibre Corporation and
the Champagne Paper Company, but in the Spring of 1937 the Chempco, Incorporated, entered
into grower's contracts with seventy-nine farmers on Winona and Wabasha Counties of
southern minnesota, and besides furnishing the seed, sent balers and trucks to the farms
and removed the harvested crops from the fields. The contract used by Chempco,
Incorporated, was vastly different from that used by Holton and the Northwest Hemp outfit.
The farmer paid no money to the company under the Chempco contract. Seed was furnished by
the company on "memo" and the cost deducted from the delivery price of the hemp.
It further stipulated that "all payments, provisions and conditions as hereinabove
provided in this contract, shall be completed in its entirety not later than April 1,
1938." (See Exhibit "F"). Holton's contract was a one-sided document as I
shall hereinafter point out.

During the early part of 1937, Gunderson interested the Harry H. Straus organization in
the possibility of hemp to the extent that the Central Fibre Corporation was organized by
Straus, Lawrence F. Dixon, et al. Chempco entered into an agreement with the Central Fibre
corporation whereby it would buy and process all hemp produced by the latter company. In
turn the Central Fibre Corporation would market the fibre, but Chempco, Incorporated,
encountered financial difficulties and during 1937 the company showed a loss of $25,000.
The company bought up 2,611,259 pounds of the old 1934 and 1935 crops grown under the
Northwest Hemp Corporation contracts, but failed to make payment in full for it. Dr.
Johnson of Hartington, Nebraska, invested heavily in the company and had his son, J. A.
Johnson, a young man under thirty years of age, made Vice President at a generous salary
and expenses. No one, except, perhaps, E. A. Hafner, the Secretary, who had been with the
old Union Fibre Company, at Winona, for a period of ten or twelve years knew anything
about hemp. Gunderson had gone overboard at the Blue Earth Bank and had to resign on
account of the defalcations, the bonding company making good the shortage. Finally, early
last Summer the company folded up and its only tangible assets are about 3,000 tons of
hurds stacked at the plant and Gunderson is back on his father's farm at Rake, Iowa, with
his wife and three children, where he exists upon parental charity.

CENTRAL FIBRE CORPORATION:

As hereinbefore stated, this company was organized in the early part of 1937 by Harry
H. Straus, Lawrence F. Dixon, Walter V. Landeck and others. Straus is reported to have
been the financial backer. Organized under the laws of the State of Minnesota "to
grow, cultivate and produce, sell and generally deal in flax, hemp and other agricultural
crops and products", the Certificate of Incorporation was filed on the 24th day of
February, 1937. The company leased a section of an old grist mill at Blue Earth,
Minnesota, and opened an office therein during March of that year. During the Spring of
1937, the company entered into contracts with sixty two farmers in southern Minnesota and
started in the hemp business. In addition to that, the company purchased 428,583 pounds of
the old 1934 1935 crop grown under the Holton, or Northwest Hemp Corporation, contract.

Decorticating machinery was installed and a total of 148,090 pounds of fibre were
produced, but it was never shipped and at the time of my visit to the plant last month, it
was still stored there. After processing the hemp grown under contract and that acquired
by purchase from the farmers, the company closed the plant at Blue Earth, removed the
machinery, and all that remains of its venture in southern Minnesota hemp is the fibre
stored in the old mill building. I examined the bales, they are well stored, but the fibre
may well be classified as "tow", or short length fibre mixed with hurd. The
decorticating machine used by the Central Fibre Corporation was not capable of separating
more than 18 percent of the fibre from the stalks and much of the long length fibre was
broken during processing. I was informed that the Champagne Paper Company, owned by the
Straus interests, is building a paper mill at Brevard, North Carolina, and that as soon as
operations are commenced the fibre in storage at Blue Earth will be moved to Brevard and
used in the manufacture of paper. The life of the Central Fibre Corporation was a short
but active one. It fulfilled its obligations to the farmers, paid its bills and departed
from Blue Earth with a clean bill of health.

CANNABIS, INCORPORATED:

After the collapse of the national Cellulose Corporation, or as it was later called,
Hemp Chemical Corporation, Holton found himself in a precarious position. First, the
farmers had about exhausted their patience with him; they wanted to dispose of the hemp
stored on their farms, so when Gunderson, himself, and thru agents, offered to buy their
crop, the sale was quickly consummated and hemp started to move toward Winona. Following
that, the Central Fibre Corporation commenced buying the 1934 35 crop and tons of hemp
moved toward the plant of that company at Blue Earth and it was being purchased at much
less than the $15.00 per ton stipulated in the Northwest Hemp Corporation contract.
Litigation added to his troubles, but of that I shall write in a later paragraph.

In order to keep his original project alive, Holton organized Cannabis, Incorporated,
under the laws of the State of Minnesota. The officers and directors were all occupying
similar positions with the Northwest Hemp Corporation. The purpose of the corporation. As
shown by the record, was to "manufacture and prepare hemp and other fibre from raw
material sources, etc., etc., and a Certificate of Incorporation was file don April 9th,
1937. The company leased the old woolen mill on Second Street, at Winona, Minnesota, and
during the Spring and Summer months of 1937 conducted much experimental work endeavoring
to adapt the woolen mill machinery to the manufacture of hemp products. (See Exhibit
"G"). After attaining little success, Holton finally decided upon mops as a
product. He at least had a sales talk, I.e., he had many thousand tons of hemp, the
decorticating plant at Blue Earth was separating the fibre and he had a manufacturing
plant at Winona.

On the occasion of my first visit to the plant of Cannabis, Incorporated, I found it
idle. E.G. Witt, in charge of this plant, and who styles himself Assistant Secretary and
Assistant Treasurer of the company, explained that they had trouble with the machinery and
a breakdown occurred the previous day. He stated that they were making the necessary
repairs and the plant would be in operation the following day. I returned the following
day, but on the occasion of that visit I found the machinery still idle. Two men and one
girl were in the plant and when Mr. Witt started to demonstrate the operations it was
quite evident that he was making a pathetic attempt to support his rather extravagant
statement regarding the extent of their operations.

Mr. Witt stated that the fibre used in the manufacture of mops was hauled by truck from
the Blue Earth decorticating plant as it was needed at Winona. Questioned as to the
approximate tonnage used each month, Mr. Witt was rather vague, but a subsequent
investigation at Blue Earth developed the fact that approximately 40 tons of hemp had been
decorticated at the plant during the period April 1st to October 1st, 1938, or a period of
six months. The decorticating machine at that plant is capable of separating 17 percent of
fibre content from the stalks, therefore 6.8 tons of fibre was reclaimed from the 40 tons
of hemp stalk. At that rate, the so-called manufacturing plant of Cannabis, Incorporated,
at Winona, uses a trifle more than one ton of fibre each month in the production of mops
and the fact supports the contention that it is being maintained simply to support
Holton's sales talk and appease the clamor of the farmers for the removal of the old
1934-35 crops of hemp from their properties.

LAWSUITS AND LITIGATION:

The Northwest Hemp Corporation, thru its president, Frank E. Holton, ran into financial
difficulties during the Spring of 1935. Money was needed to purchase the seed to be
planted by the farmers under the 1935 grower's contracts. Promotion expenses had been
heavy. Holton negotiated a loan from the Citizens National Bank of Mankato and by
agreement assigned his interest in 550 grower's contracts as collateral. During the month
of August, 1935, he borrowed $14,375.00 from the National Citizens Bank and gave his
promissory notes to cover it. As collateral, he delivered 286 promissory notes, ranging in
amounts from $4.00 to $1,000 and aggregating $17,328.50, which had been signed by the
farmers at the time the grower's contracts were executed in 1934, together with 250 shares
of stock of the Northwest Hemp Corporation.

Every effort was made by the bank to persuade Holton to repay the loans but without
success. On March 13, 1937, the bank commenced proceedings to foreclose the pledges by
selling the notes, stock, etc., at public auction and the sale by the sheriff was fixed
for March 25, 1937. Holton applied to the District Court of the Sixth Judicial District of
Minnesota for a restraining order, alleging usury and that an officer of the bank had been
given 40 shares of Northwest Hemp Corporation stock and $2,500.00 in cash as a bonus for
arranging the loans. A temporary restraining order was issued and hearings were scheduled,
but before the Court could settle the matter, Holton borrowed $9,500.00 from another bank
in Mankato and it was accepted by the Citizens National Bank in settlement of all
obligations. The promissory notes, stock certificates contract assignments were all
returned to Holton by the bank, and the temporary restraining order was vacated by the
Court on July 12, 1937.

In the meanwhile, J.H. Gunderson and his agent, Riley Lewis, a broker, were buying up
stacks of the 1934-1935 crop from the farmers. Most of the hemp so purchased was shipped
to the Chempco, Incorporated, plant at Winona, but quantities went to the Central Fibre
Corporation plant, at Blue Earth, and Lewis sold 202,450 pounds direct to the Maisewood
Insulation Company at Dubuque, Iowa. Holton claimed that the hemp grown under the
1934-1935 contracts was the property of the Northwest Hemp Corporation; that the Citizens
National Bank of Mankato and Riley Lewis were inducing, soliciting and urging the farmers
to sell their crops to other interests, so during September 1937, he filed action against
the bank and Lewis, applied for a restraining order and asked for $50,000.00 damages. A
hearing on the application for the restraining order was held before Hon. Harry A. Johnson
of the District Court of the Sixth Judicial District of Minnesota on October 7th, 1937,
and, after listening to arguments, the application was denied.

During the Fall of 1935, and at about the time Holton was in bad shape financially, the
Northwest Hemp Corporation made application to the State Securities Commission for
permission to sell the stock of that company, altho many shares had already been sold. A
hearing was held and under the date of November 19th, 1935, in a formal notice, permission
was denied. The basis given for denial was, in effect, that the Commission believed fraud
would result from the operations outlined in the application; that too large a proportion
of the profits would be inuring to the principals and those with whom the principals
proposed to do business, rather than stockholders of the corporation; that while the
application had the color of being beneficial to the farmers, upon analysis it appeared
that the farmers would be subject to domination of the applicant and his associates with
respect to their rights to contract with others in the growing of crops; that the contract
was so worded that at the best the farmer received only what the applicant wished to pay;
that it was unfavorable to the grower and disproportionately favorable to the applicant
who had contributed only a nominal amount in proportion to the amount paid in. The notice
was aimed at Holton rather than the corporation as such.

The average citizen would construe the Commission's notice as an order not to sell
stock in the company, but not Holton. He continued to sell stock for whatever cash he
could get for it and will sell it to-day if he can find a buyer. I, personally, saw
certificates of stock that were issued during October and November, 1937, and I know the
names of many who purchased stock during that year. In one instance, two maidenly ladies
of La Seuer, Minnesota, bought one share of stock for which they paid Holton five hundred
dollars. He promised a handsome return on the investment. Receiving no dividend, they took
him to task and threatened criminal action. Holton gave them several shares gratis and
more promises. Since the date of the original purchase, they have received nineteen
additional shares for no extra cash as a result of additional threats. The southern area
of Minnesota is replete with similar instances of Holton's perfidity, but I was not
instructed to investigate his financial affairs and any reference to them in this report
is for the sole purpose of emphasizing relevant facts which have bearing upon the hemp
grown by the Northwest Hemp Corporation, controlled and dominated by Holton, and its
ability to dispose of the 1934-1935 crops now stacked on farms of the southern area of
Minnesota.

EXISTING 1934-1935 CROPS ON FARMS:

The records of the Northwest Hemp corporation, augmented by a perusal of Court records
and personal visit to many farms, disclosed the following planting of hemp under grower's
contracts during 1934 and 1935:

The consensus of opinion is that two tons per acre is a fair estimate of yield,
therefore the 8,443 acres planted should have produced a total of 16,886 tons of hemp.

The Northwest Hemp corporation claims ownership of all hemp grown under contracts
during the 1934-1935 period, but its records were found to be in chaotic condition and, in
order to arrive at any satisfactory conclusion with respect to the number of tons stacked
on the farms, it was necessary to consult many growers, scale records, records of
purchasers and individuals interested in the crops. As a result of such rather exhaustive
inquiry, the following is an estimate of the tonnage actually removed from the fields:

Allowing 15 percent for depreciation, burning, theft, etc., the following
recapitulation, in round figures, represents the situation at the present time in the
Mankato-Blue earth-Lake Lillian areas of southern Minnesota at the present time:

Less approximately 15 percent for depreciating, burning, theft,
etc................................................... 2,000

Estimated tonnage stored on fields of farms and at decorticating
plants.............................................. 11,000

The major portion of the harvested hemp now stored on the fields is on farms located in
Kandiyohi, Renville, Blue Earth and Faribault counties, in order of tonnage, while lesser
quantities are scattered over a half dozen other counties. (See Exhibits "H" ,
"I" and "J"). At the three decorticating plants. Viz., Mankato, Blue
Earth and Lake Lillian, large quantities have been stored since 1934 and 1935(See Exhibits
"K", "L" and "M"). In most instances the stacks are well
preserved, altho number that were improperly stacked have become soggy in the interior as
a result of the rain and snow. Authorities agree that hemp in well preserved stacks can be
decorticated and produce good fibre even if stored on the fields for a period of ten
years.

PILFERING AND BURNING:

Due to publicity given to the existence of the stacks of old 1934 and 1935 hemp on the
farms, they have become a source of supply for the traffickers in marihuana. In many
instances, the stacks are located adjacent to the public highway (See Exhibits
"N", "O", and "P"), and quite accessible to any one desirous
of obtaining a supply of leaves and tops because, as the analyses have shown, those parts
of the plant still contain an active narcotic principle and all one has to do is remove
the top layers of bundles and find a most desirable product for smoking purposes. Many of
the stacks, particularly in Blue Earth and Faribault counties have been pilfered (See
Exhibits "Q" and "R"). The Bureau records contain a number of cases in
which it was developed that the marihuana had been obtained from stacks in southern
Minnesota and with adequate personnel to devote to the task of investigating all cases of
theft of marihuana, or hemp, coming to the attention of local the law enforcement
officers, many more violators of the Marihuana Tax Act could be prosecuted.

During the period of my survey in the hemp growing area, a number of farmers, tiring of
being awakened at night by the barking of dogs at the looters, as well as of keeping the
stacks of hemp properly trimmed, have defied Holton's admonition not to destroy the stacks
and simply set fire to them. In each instance, the farmer, when questioned, has stated
that lightning struck the stack and the resultant fire destroyed it, because Holton has
threatened to take court action against any farmer who destroys any of the 1934 or 1935
crop. Generally speaking, the farmer is in sympathy with the officers in the enforcement
of the Federal and State Marihuana Acts. Numerous instances were called to my attention
wherein farmers have discharged shotguns at persons prowling about the hemp stacks and the
Sheriffs of Blue Earth and Faribault Counties have answered many telephone calls from
farmers who have reported that men were pilfering the stacks, but as long as the stacks
remain on the fields they will be a source of supply for the traffickers and a constant
annoyance to those engaged in enforcement of the marihuana laws.

VIOLATIONS OF THE MARIHUANA TAX ACT:

Since the effective date of the Marihuana Tax Act, October 1st, 1937, practically
everyone interested in the growing, processing or dealing in hemp in southern Minnesota
has been violating some provision of the Act and the regulations pertaining thereto. At
the outset, confusion existed with respect to the application of the Act to the old 1934
and 1935 crops, due in great measure to misinformation supplied and the erroneous
impression created with respect to the conditions of the plants which had been harvested
and then stacked on the fields; then a similar situation presented itself in dealing with
the 1937 crop which had been harvested and was ready to be moved to the decorticating
plants.

The records of the Bureau indicate that the Central Fibre Corporation and Chempco,
Incorporated, made what may be construed as an honest effort to comply with the Marihuana
Tax Act. The former registered with the Collector of Internal Revenue of the District of
Minnesota as a dealer, while the latter registered as a processor for the fiscal year
1938, but in transferring tons of the old 1934-1935 crops from the farms to the mills, as
well as that grown under contract during 1937, both companies were liable to the transfer
tax imposed by the Act because the stalks contained an abundant supply of tops and leaves.
Furthermore, the Central Fibre Corporation should have registered as a processor in Class
1 for the reason that it was engaged in processing the stalks with tops and leaves at the
Blue Earth decorticating plant.

The Northwest Hemp Corporation, thru its President, Frank E. Holton, maintained that
the provisions of the Act did not apply to activities of that company and gave wide
publicity to a letter written by the Bureau under date of October 19, 1937, in reply to a
letter from the company under the date of October 11, 1937, in support of that position,
but in referring to the letter from the Bureau, Mr. Holton adroitly omitted a very
significant statement contained therein, viz, "assuming that these stalks are
practically free of leaves or flowering tops containing resin." The Northwest Hemp
Corporation, however, finally registered as a dealer in Class 111 for the period April 1st
to June 30, 1938, but, as in the case of the Central Fibre Corporation, it, too, should
have registered as a processor in Class 1 because it was engaged in processing plants
which contained leaves and flowering tops. Furthermore, while the Central Fibre
Corporation and Chempco, Incorporated , arranged to register all the farmers as producers
with whom they had grower's contract, as well as those from whom they had purchased
quantities of the 1934-1935 crops, the Northwest Hemp Corporation made no such provision
for farmers from whom it obtained hemp plants for decorticating at the Blue Earth plant.

For the fiscal year 1939, Chempco, Incorporated, registered as a dealer in Class 111,
altho it has discontinued operations at its Winona plant. The Northwest Hemp Corporation
has also registered as a dealer, but since July 1st, 1938, or between the period of July
1st and August 24th, that company has transferred a total of 138,330 pounds of hemp from
four different farms in Faribault County to the decorticating plant at Blue Earth as
follows:

The fibre produced from the hemp was shipped to the Cannabis, Incorporated , at Winona,
Minnesota, for use in the manufacture of mops. In transferring the plants from the farms
to the decorticating plant, both the company and the farmers violated the provisions of
Chapter IV, Regulations No. 1, having to do with transfer taxes because they contained
tops and leaves, and the farmer incurred further liability for failing to register as a
producer. On the occasion of my first visit to the Blue Earth decorticating plant, as well
as on the occasion of subsequent conferences with Mr. Holton, I called attention to the
transfer provisions of the Marihuana Tax Act and up until the time of my departure from
the Mankato-Blue Earth territory, or October 15, 1938, no further deliveries of hemp to
the decorticating plant had been made.

Throughout the southern area of Minnesota there are 400 or more farmers who are
violating the provisions of Article 96, Regulations No. 1, in that they are not properly
safeguarding the hemp containing tops and leaves now stored on their farms, but those
farmers are innocent victims of a situation created by happenings over which they had no
control. As hereinbefore pointed out, many of the stacks are adjacent to the highways and
quite accessible to any one seeking a source of supply of marihuana for smoking purposes.
On the other hand, many of the stacks are from one-quarter to one-half mile distance from
the dwellings. When strangers are seen near the stacks, the farmers usually call the
Sheriff or, if at night, fire a shotgun. I do not believe that the farmer is expected to
provide guards for the stacks, altho that is about the only way looters can be kept from
them, and it would be unfair to impose any penalty for failure to do so.

CONCLUSIONS:

The problem confronting the bureau at the present time with respect to the
commercialize hemp situation in southern Minnesota is, first, what disposition shall be
made of the harvested 1934 and 1935 crops now stacked on the farms, and, secondly if it is
disposed of by purchase, how can it be transferred from field to mill without imposition a
transfer tax? In considering the problem, two factors must be considered, i.e., the
position of the farmer and that of Frank E. Holton, President of the Northwest Hemp
Corporation. The farmer is entitled to compensation for the product of his labor, but in
providing such compensation, the interest of Holton in the crops under the grower's
contract, must be considered. The Northwest Hemp Corporation, dominated by Holton is in no
financial position to take over the hemp for decorticating and marketing, altho for the
past three years by means of alluring promises contained in individual letters to the
farmers, Holton has endeavored to stimulate their hopes that he will eventually come to
their rescue and fulfill his contract obligations. If it were not for the fact that he
holds their promissory notes, which practically amount to chattel mortgages on their
property, they undoubtedly would feel less inclined to string along with him.

In recent weeks, Holton has been devoting his time to the promotion of a hemp growing
venture in the State of Mississippi similar to that which he inaugurated in Southern
Minnesota during the Fall of 1933, and which precipitated the present situation. His
Mississippi scheme is to grow hemp in that state and mix it with cotton in the manufacture
of textiles, but while growing the first crop in the South, and so that the actual
manufacturing project can get started, he proposes to transfer the old 1934-1935 from
Minnesota to Mississippi. According to his version of the project, it will revolutionize
the textile industry. The proposed project is widely disseminated among the farmers. It
contains a ray of hope for them, however fantastic it may appear to those familiar with
the cotton industry of the South. Holton's forte is preying on the gullibility of his
victims and he has found himself strangely rewarded for his endeavors in the farm belt of
southern Minnesota, altho in the Lake Lillian area he is decidedly persona non grata at
the present time on account of misrepresentations to the farmers in that district.

Neither the exact status of the grower's contract or the promissory notes has been
passed upon by any Minnesota court of record, but the opinion is freely expressed by legal
authorities that if the matter is brought before any judicial tribunal the decision will
be in favor of the farmers. The farmer, however, dislikes court actions, - they cost money
and take up his time, consequently they have been reluctant to obtain any judicial
interpretation of the contract or the status of the promissory notes, so as the matter
stands, Holton holds a whip hand over the farmer and unless his noninterest in the
harvested hemp is definitely established by competent authority, he will endeavor to exact
his pound of flesh in the event that a market for the crops is found, or they are removed
from the fields by other means.

Prior to my departure from the hemp growing area of the state, a movement was started
by the farmers in the Lake Lillian area to remove Holton from his position as President of
the Northwest Hemp Corporation thru receivership methods and endeavor to dispose of the
1934-1935 crop of harvested hemp through either Federal or State assistance. A committee
was formed and Olai A. Lende, Attorney-at-law of Granite Falls, Minnesota, was appointed
Chairman and Legal Adviser. Mr. Lende obtained power of attorney to act for the farmers in
that area. The farmers believe that some form of relief can be obtained by either Federal
or State legislative action. The opinion is formed, as a result of my survey of the hemp
situation, that such action is the only remedy for the reason that, first, I do not
believe a buyer for the old 1934-1935 crop can be found, and secondly, there is no market
for hemp at a price which would net the farmer a reasonable return, let alone profit, for
his product.

RECOMMENDATION:

The existence of the old 1934-1935 crop of harvested hemp on the fields of southern
Minnesota is a menace to society in that it is being used by traffickers in marihuana as a
source of supply and as long as it remains in the fields it will be of potential trouble
and annoyance to those engaged in the enforcement of the Federal and State marihuana acts.
Every stack contains a plentiful supply of desirable tops and leaves for smoking purposes.
The farmers are entitle to reasonable compensation for their time and labor in raising the
hemp and I do not subscribe to any action which would deprive them of that return on their
investment. They acted in good faith when they planted the seed and they have no desire to
run afoul of the law because of circumstances which have caused them to be in possession
of the crops since the passage of the marihuana Tax Act. Federal funds were made available
and wild hemp was removed from counties in the state last Summer. The removal of the
harvested crops by some such similar means is worthy of consideration and I recommend that
the Bureau endorse and approve any suggested Governmental assistance, whether Federal or
State, which may bring about the removal of the harvested hemp crops now stacked on the
fields of southern Minnesota.